Trade Compliance

Trade Compliance

What is Trade Compliance?

“Trade Compliance” describes terms and conditions of all trade between two or more countries that ensures full compliance with the applicable laws and regulations laid down by the competent authorities.
Trade compliance is mandatory, a goal not easy to reach, and, at the same time, anopportunity. In trade, it becomes more and more complex ensuring full adherence to the supply, import, export and transfer of assets policies. Trade compliance ensures stability and ethical practices in all trade operations around the globalized marketplace, threatened by the illegality and involved in geopolitical dynamics.
A company that has to pursue with the trade compliance, has to do a very hard work, and needs, first, to avoid sanctions, but also to take economic advantages (ex: benefits on custom duties), and, in the end, to improve supply chain and reputational visibility.

Trade compliance is the status of companies that are compliant with the several and changing regulations about the exchange of goods arising from EU directives, regulations and laws, as well as EU and Extra-EU Treaties. Moreover, companies have to prove it through declaration, authorization and certification. National and International rules change every day. Furthermore, the increasing globalization in the markets constantly creates new commercial dynamics that makes the supply chain control difficult.
Compliance provides specific duties and limits for some products typology (like the dual use that are a defense tool or the one containing chemicals), but other regulations can be worth for each industry category and sector (ex: embargoes).

Typically, a trade compliance program has to include::
• periodical monitoring of the international agreements, directives, Europeans regulations and laws, and national legislations on trade (included embargoes and benefits);
• identifying risks;
• developing a checklist and procedures that have to be adopted by intermediate operators in the supply chain, brokers, suppliers, etc…;
• tax audit;
• certificate of origin;
• record of the documentation internal and external to the company (for example: from suppliers);
• preventing and mitigating damages related to violations of rules.

In the bigger companies, this work can be committed to a professional, the trade compliance manager. Since it is a transversal work to the company departments, in the process it is also included the purchasing, the import, the export and the legal affairs manager. If companies rely on a software and a third-party support, the compliance goal is easier to reach and to keep. In view of an investment, time-consuming and high-risk activities can be avoided, since the subject is extremely technical and changeable, and the trade compliance becomes in a systemic component that is part of the business.

The Preferential, Non-preferential Origin and “Made In” Management

One of the central aspect of the trade compliance is the origin of the good: it can depend both on the place of origin of the commodity and on the eventual transfers between the supplier and the buyer. From the point of view of certifications and consequent advantages, there are two categories: preferential and non preferential origin.

Thepreferential origin allows taking advantage of a reduced or a nil duty when the company exports the good towards countries with which the European Union has signed advantage agreements for trades.
When the company sells from Europe toward Extra-EU countries, thanks to the preferential origin status, it has the right to a better tariff treatment. Reducing the exporting costs, the preferential origin makes the good more competitive and can even represent a benefit for the importer.
The benefits vary depending on the type of the product: reduced duties, nil duties, abolition of the maximum Export Limit, etc.

How to determine the preferential origin? Generally, the country of origin is the one where the good has been made or been subjected to a substantial transformation. However, many rules change according to the specific agreement between the EU and the single extra-EU country and according to the good category (from which depends the duty value, the maximum percentage of the semi-finished products, non-original components or commodities, etc…).
Considering the associated benefits, the preferential origin has to meet stricter criteria compare to those provided for in the Community Customs Code (art.24) for the non-preferential origin. After having received the written application from the exporter, the customs authorities consider the release of the movement certificate EUR 1, that certifies the European origin of the good.

Managing the preferential origin means finding and providing several data, dealing with technical documents, complex procedures, calculations, controls and potential administrative sanctions or criminal proceedings against the company, in case the certification is not compliant.
Now, there are IT solutions that help to manage the whole process in an integrated way, using automatic controls and procedures that simplify the job and error and sanction risks.

Thenon-preferential origin allows determining the Country of Origin of the good or where the last substantial transformation of it, took place. It can be certified by an origin certificate issued by the chamber of commerce (in this case, the declarant is responsible) or by an invoice declaration, in which the good is certified as “made in…”.
The “made in Italy” example is perfect to explain how this origin could have a commercial and marketing value. The big difference between the two categories is that the non-preferential origin does not give the right to the advantages on duties for the good export.

Import and Export monitoring

The import and Export have to follow many policies: it not only is important to check the geographical indication and the Country of destination of the good, but in order to avoid sanctions, it needs to have visibility on suppliers, customers, intermediaries and features of sold or bought products.
The national legislation Dlgs No. 221/2017 regulates the export of dual-use items and those established as embargoes by the European Union. The legislation has introduced criminal penalties for the companies found exporting to the embargoed countries (the only embargoed country before was Iran). If a European company has branches or subsidiaries in the United States or suppliers that produce in the United States, it has also to considerate the rules and the penalties of the USA.

The dual-use items
The dual-use items are products, software or technologies designed for the civil use, but they are suitable for a military use, potentially. Treaties, United Nations resolutions and international conventions regulate their use, with the purpose of avoiding that the trade of those goods can contribute to programs of chemical, biological and nuclear proliferation or that they can be used to make weapons of mass destruction.
Their exportation is controlled by the European Union, as in the Council Regulation (EC) No 428/2009 (in Italy is the D.Lgs No 221/2017) that list (in the Annex I) the list of the dual-use items and their related codes. In order to export them, it is necessary an authorization from the Ministry of Economic Development.

The sanction lists
Sanction lists are a very useful to counter illegality and terrorism. There are official lists of individuals, groups, organizations and companies on which economic or legal sanctions are running, valid in the European Union and in the national territories.
In Europe, the most important sanction lists are the UN Security Council list and the Common Foreign Security Policy list, which is a policy undersigned by the EU Member Countries. Moreover, the existing lists in the United States, in first place the Office of Foreign Asset Control list (OFAC) of the Treasure Department, are also applied to the European companies that deal with American goods. The files are available as open data via Web, but their consultation can be tricky because of the complexity of the classification and the associated codes.

The block on trades to a Country for a political or an economic reason is another element in trade compliance. If an Italian company does not respect the commercial embargo, according to the Dlgs No. 221/2017 (in force since February 1st, 2018), there can be criminal penalties.
Previously, the criminal proceeding was provided only for those who were not respecting the trading ban with the Iran, so the legislation is becoming stricter.
The existing embargoes in Italy are overlapping to those defined at a European level. The Ministry of Economic Development list is including Afghanistan, Belarus, Burma, North Korea, Congo, Côte d'Ivoire, Crimea and Sevastopol, Egypt, Eritrea, Guinea, Haiti, Iran, Iraq, Lebanon, Liberia, Libya, Moldova, Russia, Syria, Somalia, Sudan, South Sudan, Tunisia, Ukraine, Zimbabwe. Together with the Treaty on the Functioning of the European Union (TFUE) is associated a list of the community rules towards the Countries submitted to commercial restrictions, included embargoes on some goods categories (weapons, dual-use) and types of investment. The document is periodically updated and freely available, but is only written in English.

Business Partner Reputation
An important aspect of the trade compliance (sometime neglected) is the business partner reputation screening, in other words of the people or organizations with which the company weaves trade relationship of supplying, outsourcing, brokerage, selling. Many actions can influence on the reputation of a company and cause a cascade on their commercial partners, from the most serious cases (as corruption and child labor) to offences and commercial illicit.
Not to check a business partner reputation can have costly consequences, such as fines, compensation, legal cases, interruption of the activity, constrained resources, and more.
The screening is a complex activity because it is difficult to identify all the stakeholders in the supply chain. The possible methods are the research of background information on the potential business partner, the integrity screening, and the complex procedures of Business partner compliance screening (Bpcs).
In addition, to evaluate pros and cons of a new trade relationship could be useful to apply the SWOT analysis to the specific case. In any case, the data to consider are a lot and not easy to reach and objective verification. That is why the Business partner compliance screening is a particularly critical element of the trade compliance, which is based on objective data instead of the instinct.

The beneficial owner
To trace the source of an activity (in other words, the actual owner or the beneficiary) it is not always easy, especially when in a trade relationships are involved funds, financial institution, brokers, and multiple intermediaries. In Europe, different laws and regulations regulate the beneficial owner identification, contrasting the anti-money laundering and other illicit activities.
The Directive No. 2015/849 of the European Parliament (Fourth Anti-Money Laundering Directive – in Italy Dlgs No. 90/2017) has imposed to the member Countries the duty to establish national centralized records of owners of companies and trusts. Those records has to be accessible in case of request and due diligence.
The Fourth Anti-Money Laundering Directive defines the beneficial owner as the person (or the people) that owns or manages the company at the highest level, or the person (or the people) in whose name the company is carried out by others. Direct ownership refers to natural people that own more than 25% shares or control property interests of a legal entity; indirect ownership refers to a company that own more than 25% shares.
The UE countries have difficulty in consider lower shares as sufficient statement of ownership or control. The Dlgs No. 90/2017 defines the beneficial owner as “the natural person or people, different from the customer, in the interest of whom, ultimately, the ongoing relationships is established, the professional service is given or the transaction is executed”.

The REACH Certification and the RoHS Certification

In addition to the counter-terrorism and anti-money laundering, a third big concern of the legislations on the trade relates to the protection of human health and the environment. To avoid the hazard of the produced goods, imported and exported, in Europe two different compliance certifications are applied: REACH and RoHS (updated in the years with RoHS2 and RoHS3).

The REACH Certification

The European Regulation No. 1907/2006 of the European Parliament, in force since June 1st 2007, regulates the registration, the evaluation, the authorization and the restriction of chemicals (REACH) used in the production of a good. The term “chemicals” is not necessarily used for substances in test tubes, because they can be, not only in materials, mixtures, solvents, tinctures, additives and in other elements involved in the production process, but in furniture, in plastic objects, clothes and accessories. Therefore, the REACH certification interests a great range of companies that produce, export, import or use some chemicals in their process.

The Regulation combines a “high-level concern” to the carcinogenic substances, to the one that can cause genetic mutations or damage to the reproductive system, to the persistent, bio accumulative and toxic substances. Compared to the previous regulations, the REACH certification gives more responsibility to the producer and the exporter of chemicals (destined both to an internal and an external use) and to the importer of goods from Extra-EU Countries as well. Those companies have to demonstrate that the good is not a risk neither for the human health nor for the environment.

Those information about chemicals have to be reported by the companies during the supply chain in the clearest possible way. Moreover, in case the company produces or imports chemicals in large amounts in the European Union (above a ton per year), it must notify to the European Chemical Agency (ECHA). The latter and the member Countries value the risk levels on the single records and, if necessary, they can ban or limit the use of the hazardous chemicals.

The RoHS Certification

Also the RoHS (Restriction of Hazardous Substances), RoHS 2 and RoHS 3 European Directives regulate the risk associated to the hazardous substances, but relatively to the electronic waste problem. Those Directives interest all the producers, importers and exporters of Electrical and Electronic Equipment (EEE), that include a great range of goods such as I.T., telephony, small and large domestic appliances, light bulbs, toys, medical devices, and so on. The scope is as broad as the one of the REACH Regulation, but in that case, only the chemicals risk, used in the production process, is considered. In the RoHS Directives, also the substances contained in the goods are considered, since they are potentially hazardous for the customer and difficult to dispose, by the time the device becomes an e-waste.

The Directive No. 2002/95, called RoHS, which has been in force from 2006 until 2013, ensures the compliance with six restricted substances: cadmium, hexavalent chromium, lead, mercury, polybrominated biphenyls and polybrominated diphenyl ether. The restrictions are still valid, but the dispositions have been updated with a more complete version, the Directive No. 2011/65, called RoHS 2 (in Italy D.Lgs No. 27/2014). RoHS 2 better specifies some definitions and adds other restrictions to the list. A further update, the Directive No. 2011/65 (RoHS 3), adds to the list the di-octylphthalate, the benzyl butyl phthalate, the dibutyl phthalate and the diisobutyl phthalate.

Compliance is necessary to the RoHS certification in order to obtain the CE marking. It is a hard work for companies, since they have to overlap the REACH and the RoHS restrictions and get information about substances used by their suppliers during the whole supply chain.